Question

Explain the main differences between debt and equity. In a company today, which is better debt or equity? Explain your decision.

Answer 1

Main Differences between debt and equity
1. Debt requires regular interest payments whereas dividend payments in case of equity may not be paid regularly.
2. Cost of debt is lower than cost of equity.
3. Interest payments on debt is tax deductible whereas dividends are not tax deductible.

Actually optimal capital structure including both debt and equity is best. Optimal debt equity helps to minimise the WACC and hence increases the value of the firm. Debt increases risk but optimum debt also increase ROE which makes it attractive fro investors